AECOM (ACM) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the AECOM first quarter 2010 earnings conference call.

My name is Shamika, and I will be your coordinator for today.

At this time, all participants are in listen-only mode.

We will conduct a question-and-answer session towards the end of today's conference.

(Operator Instructions).

I would now like to turn the presentation over to your host for today's call, Mr.

Paul Cyril, Vice President Investor Relations.

Please proceed.

Thank you, Shamika.

And welcome, everyone, to AECOM's first quarter 2010 earnings conference call.

On slide 2, as we begin, let me remind you that today's discussion contains forward-looking statements based on the environment as we see it today, and as such, does include risks and uncertainties.

As you know, our actual results may differ materially from these projected in our forward-looking statements.

Please refer to our press release or slide 2 of the earnings presentation and to our reports filed with the Securities and Exchange Commission for more information on specific risk factors that could cause actual results to differ materially.

As we begin our call, let me remind you of some of the important information about our earnings that are posted on the investor website, investors.aecom.com.

First, we posted our earnings release and updated financial statements on the site for anyone who still needs access.

Second, a replay of today's call will be posted there at around noon Eastern time and will remain there for approximately two weeks.

Please go to slide 3.

And lastly, since we are using some non-GAAP financial measures as references, the appropriate GAAP financial reconciliations are posted on our website as well.

Presenting today will be John M.

Dionisio, President and Chief Executive Officer, and Michael S.

Burke, Executive Vice President and Chief Financial Officer.

John, please go ahead.

Thank you, Paul.

Good morning, everyone, and thank you for joining our call today.

I will begin with a few introductory remarks, and then I will turn the call over to Mike Burke who will discuss our first quarter financial performance and our outlook for fiscal year 2010.

Following Mike's comments, I will provide an update on our market and the business trends.

As an overview, 2010 is off to a good start.

During the first quarter, we saw a steady flow of new wins and opportunities across our global end markets and geographies.

We closed the quarter with record backlog of $10 billion.

Our M&A opportunities remain robust, and we have a strong balance sheet to fund future growth.

Looking ahead to the rest of 2010 and beyond, we see signs of improvement in many of our markets.

I believe we have the right balance of market and geographic diversification for continued success.

For instance, we are well positioned to capitalize on a number of strong opportunities in the United States' federal market and stimulus-funded projects in the United States and abroad.

With that, I'd like to turn the call over to Mike.

Mike, please go ahead.

Thank you, John.

Please turn to slide 6.

Our first quarter gross revenue increased 2% over last year's first quarter to $1.5 billion.

Our net service revenue was up 8% to $962 million.

Our first quarter's growth was primarily driven by continuing strength in U.S.

transportation, the U.S.

federal government sector, China and Hong Kong, the Middle East and Canada.

That growth was offset by slower performance in our private sector business and in the U.K.

Foreign currency recently turned in our favor and positively impacted our first quarter results.

Organic net service revenue was up 4% for the quarter, including the approximate 5% foreign exchanged tailwind.

Net income was $46 million, up 12% year over year.

Diluted earnings per share from continuing operations were $0.40, up 5% year over year despite a 7% increase in our diluted share count.

Please turn to slide 7.

Our PTS segment accounted for 81% of our first quarter gross revenue.

Net service revenue in our PTS segment increased 4% from last year to $884 million.

The single largest driver of our year-over-year increase in PTS net revenue was Asia, which grew 25%.

Our PTS segment backlog increased 11% over last year.

Operating margins in the PTS segment fell slightly over last year with operating income at $74 million, down 3%.

The quarter's results were impacted by a one-time $4.5 million severance charge in the U.K.

We believe that we have appropriately right-sized this business and do not expect these costs to reoccur.

The performance of our management support services segment, which accounted for 19% of our revenue in the first quarter, continued to be quite strong.

Revenue for the quarter was $276 million, up 24% over last year.

This growth reflects higher levels of activity for the U.S.

Air Force under the $10 billion CFT contract.

Operating income increased 34% over last year to $13 million.

Going forward, we are well positioned to capitalize on numerous growth opportunities in this segment organically, as well as through M&A.

Please turn to the next slide.

In the first quarter, our EBITDA margin decreased 17 basis points over last year.

The margin was impacted by one-time costs of $4.5 million related to severance that I mentioned earlier and our AECOM global brand launch of $3.7 million.

Although we operate as one company, we had used different brand names for most AECOM companies outside the U.S.

During the quarter, we changed all of those names to AECOM and incurred costs related to brand imaging and marketing.

Our EBITDA margin would have increased 68 basis points over last year without these one-time investments.

Looking forward, we are confident in our ability to continue to expand our EBITDA margin and achieve our goal of generating EBITDA margin improvement of 20 basis points annually.

Please turn to the next slide.

At the end of the first quarter, our balance sheet remains strong with $253 million in cash and cash equivalents and $187 million of debt.

As of December 31st, we had $470 million in unused capacity under our $600 million credit facility.

As is typical in the first quarter of the year, our cash flow from operations was negative.

The key factor driving this decline was the timing of approximately $30 million of U.S.

federal government invoices.

We have recently received payment for almost all of those invoices.

As we noted last quarter, we have seen a rebound in M&A activity and a moderation of price expectations in the market.

We completed three strategic transactions in the first quarter, and our pipeline of small and large opportunities is robust.

We expect to put more capital to work in 2010 and trend back to our normalized target debt leverage of 1.5 times EBITDA.

Please turn to the next slide.

New business wins in the first quarter totaled $1.6 billion.

We closed the quarter with record backlog of $10 billion, an 11% increase over last year and a 6% increase over the fourth quarter of fiscal year 2009.

Additionally, our first quarter PTS segment backlog of $9 billion is up 11% year over year, or 4% higher sequentially.

A little more than half of that backlog growth is organic, with the balance being inquisitive.

Note that the reported backlog balance does not include our $370 million recent win from the U.S.

government, nor $170 million of wins in the U.K.

water market which John will touch on later in the presentation.

Looking ahead, we expect to see continued growth in backlog based on the high level of opportunities in all of our end markets and geographies, driven by numerous global stimulus programs.

In particular, the U.S.

federal government stimulus package presents near-term opportunities in infrastructure, energy and power and DOE.

More importantly, the FY11 U.S.

federal budget proposal provides for increased spending in the markets that are important to us.

I should also note that our backlog figures do not include numerous IDIQ contracts that we have been awarded by the U.S.

federal government.

Our backlog figures only include specific task orders under the IDIQ contract after they have been awarded.

Many of these contracts have very large contracting capacity, a limited number of participants and provisions that almost ensure a minimum participation in the task orders.

Assuming AECOM wins its fair share of task orders under these contracts, they could add substantially to our stated backlog.

Currently, four of our largest contract vehicles, BTRIC, WERS, AFRICAP and CFT, have a contracting capacity of $16 billion over the next five to ten years.

To date, only a small percentage of these task orders have been issued, and AECOM has performed quite well.

Additionally, I should add that our gross revenue book-to-burn ratio for the first quarter increased substantially to 1.29 from 1.2 a year ago and from 1.05 in the prior quarter.

This is the highest that it's been in at least six quarters.

And combined with our increase in revenue indicates that our markets are strengthening.

A solid stream of new wins, growing backlog and a higher book-to-burn ratio provides us with good visibility and confidence in our outlook.

Please turn to the next slide.

Now I'd like to update you on our outlook for fiscal 2010.

Based on our Q1 results and our outlook for continued growth, we are reiterating our guidance for earnings per share in the range of $1.90 to $2.00 for fiscal 2010.

The midpoint of this guidance implies a 15% year-over-year growth in earnings per share.

As we previously stated, we expect our FY10 earnings to be skewed towards the second half of the year.

Therefore, we expect Q2 to be a lower percentage of full-year earnings than we have historically realized.

This guidance assumes $22 million in amortization expense related to acquired intangible assets, a diluted share count of 117 million shares and a tax rate of 28%.

Note that we have implemented FAS 160 beginning this quarter, which changes where we report the minority interest expense on the income statement.

The reporting change will make it appear that our effective tax rate is lower than our original guidance.

However, we have not changed our forecasted tax rate for the year.

With that, I would now like to turn the call back over to John who will provide additional detail on our first quarter performance and outlook.

John, please go ahead.

Thank you, Mike.

Please turn to slide 12.

As Mike described, AECOM had a strong first quarter, and we continue to plan for accelerated growth in the second half of the year.

The recent State of the Union address and the 2011 budget proposal are positives for AECOM.

We believe both will result in increased spending by the federal government across our key end markets.

For example, the recently proposed Jobs for Main Street Act would provide $25 billion in transportation spending and $5 billion for school construction.

This is in addition to the $170 billion allocated in the initial stimulus bill.

The pace of U.S.-stimulus funded projects has increased, and additional funds are now being allocated to the stimulus programs such as the high-speed rail for which AECOM has already received new work.

Since the stimulus bill was passed last February, AECOM has won over $650 million in stimulus-related projects.

This is an increase of 25% from $520 million at the end of fiscal year 2009.

And we expect the volume of activity will increase significantly over the next 12 to 18 months.

M&A activity continues to increase.

As Mike mentioned, during the first quarter, we closed three acquisitions that bolster our presence in the health care, sports and U.S.

federal government markets.

Looking ahead, we are targeting opportunities in program and construction management, high-speed rail, power and energy, and in the U.S.

federal services market.

We are also looking at geographic expansion opportunities in Latin America, India, Asia, the Middle East and Africa.

Please turn to slide 13.

In Q1, 48% of our work was performed in the United States, and the remaining 52% was performed outside the United States.

Across our end markets, we are beginning to see an increase in capital expenditures that had previously been put on hold due to difficult economic conditions.

To give you a sense of what we are seeing, I'm going to spend a minute or two talking about trends and recent wins in our key markets.

I'll begin with North America.

This market grew 5% in the first quarter, driven by strong performance in our transportation and U.S.

federal governments businesses.

Looking ahead, we expect our North America operations to benefit from a combination of increased stimulus spending and our other government-funded opportunities.

Recently, the administration announced that an additional $8 billion of stimulus funds will be allocated to high-speed rail projects in the United States.

Just two weeks ago, AECOM received notice to proceed on $15 million of environmental and engineering work on the California corridor.

In the federal energy market, we have a number of IDIQ contracts totaling $1 billion in contracting capacity.

These vehicles will enable AECOM to be selected and win stimulus awards from various departments and agencies of the U.S.

federal government.

This presents a significant opportunity for us.

In our management support services segment, AECOM has submitted nearly $5 billion of proposals for U.S.

federal government projects.

Most of these projects will be decided in the 2010 and 2011 timeframe.

Last week, we secured a $370 million logistics support contract from the Department of Defense for work in Afghanistan.

This recent win was not included in our MSS backlog at the end of Q1.

During the quarter, we also won three contracts from FEMA totaling up to $600 million for emergency recovery services, floodplain mapping and disaster recovery.

In Canada, AECOM recently won over $100 million of infrastructure projects, including a $20 million contract for program management of Edmonton's rail system.

In the Asia-Pacific region, which represents about 20% of our business, AECOM is capitalizing on an expected $8 trillion of infrastructure investment across Asia.

Our public infrastructure and facilities markets are particularly strong, and we are also seeing new opportunities from private sector clients.

For example, we recently won a planning contract for MGM's new development in Changzhou, China.

The Australian economy has remained strong throughout the economic downturn.

And our Australian markets have continued to perform well and grow over the past year.

For instance, mining market capital expenditures, which were put on hold 12 months ago, are now being reactivated.

For AECOM, Australia is a center of excellence of our mining capabilities and expertise.

We expect to leverage those resources into new markets such as Latin America and South Africa.

In the Middle East, which represents 12% of AECOM's revenue, we continue to see growth opportunities in rail, aviation, health care, education and energy and power.

With oil prices over the $70 per barrel mark, our clients continue to have significant resources to fund projects.

AECOM has won several long-term megaprojects in the Middle East.

And just recently, we won another large management services contract for the 12,000-acre Capital City District in Abu Dhabi.

We are currently bidding on a number of other megaprojects in the region, and the pipeline is robust.

As we have said before, India is one of our target growth markets.

We have been investing in India over the past few years, and it's starting to pay off.

In FY09, we won $80 million of work on two metro projects which has ramped up nicely.

We recently received a letter of intent to provide services for the Delhi-Mumbai rail corridor, and we won a contract for the Delhi sewer modernization project.

We also continue to look for acquisition candidates in this high-growth market.

In the U.K., we believe our business is stabilized, and there are some opportunities developing.

For example, the Water Asset Management Programme will allocate approximately $35 billion over the next five years on water infrastructure improvements.

AECOM has won eight of these five-year framework contracts.

Additionally, AECOM recently won two contracts totaling $170 million for the Yorkshire and Thames water programs.

These wins are not reflected in our Q1 backlog.

All told, our current project pipeline and new wins demonstrate that our strategy of diversification continues to work and point to another solid year of growth for AECOM in 2010.

Please turn to slide 14.

As you can see on this slide, at the end of Q1, our funding sources remain well diversified.

About 74% of our work was generated from public clients, up from 68% last year.

Despite the significant falloff in the private sector activity, facilities remains 27% of our business, which is now more concentrated in the public sector than a year ago.

As we have said so many times before, our diversified funding mix has enabled AECOM to win new work in both strong and weak economies.

Looking forward, we expect to see an increase in additional funding sources such as federal stimulus programs, bond issues, dedicated tax measures and public-private partnerships.

As an example, $67 billion of Build America bonds have been issued, and Washington has recommended making this a permanent funding source.

Clearly, state and local governments have had some difficulty.

However, in AECOM's key markets, such as California, New York, New Jersey and Texas, we continue to see strong investment in infrastructure.

For example, the State of California is financing its $43 billion high-speed rail project through a combination of its successful bond measure last year, stimulus funding and matching federal government funds.

Additionally, infrastructure investment in the Middle East, Asia, Canada and Australia are expected to be funded by ongoing government and private sector spending.

We also continue to see signs that public-private partnerships are becoming a more widely used source of funding.

AECOM is currently working on four big P3 projects in Florida and Texas.

Three of these are already funded, and the fourth should be funded in early spring.

We continue to see new opportunities for similar P3-funded projects in the United States.

And the administration has set aside $4 billion in the FY11 budget for an infrastructure bank which will support public-private partnership financing of transportation projects.

We believe private capital is finding its way to infrastructure projects.

Please turn to the next slide.

We are confident in our 2010 outlook, and we are focused on accelerating our growth in the second half of the year.

Our plans call for adding about 2,000 employees across the company to accommodate this growth.

There are a number of reasons we are confident in our strong growth outlook.

And I'd like to review those with you now.

We closed the first quarter with $10 billion in backlog, and we continue to win significant amounts of new work across our diversified end markets and geographies.

U.S.

stimulus funds are kicking in.

AECOM stands to benefit significantly from the continued increase in stimulus and federal government-funded infrastructure projects.

Global infrastructure spending is increasing across all our key geographies.

We are successfully expanding our business in new and emerging high-growth markets such as Africa, Asia and India.

We are gaining traction in our newer end markets and geographies.

We are winning energy and mining projects, and we now have a strong foothold in the rapidly growing health care and sports markets.

We have begun to see signs of a turnaround in some of our weak markets such as the U.K.

We have seen a distinct rebound in M&A activity.

We have closed three strategic transactions in the past quarter.

We have a solid pipeline of large and small opportunities and a strong balance sheet to fund these acquisitions.

When you put all of this together, we believe it supports our forecast for continued strong growth in 2010 and beyond.

With that, let's go ahead and open the call for questions.

Thank you.

(Operator instructions).

Your first question comes from the line of Steven Fisher of UBS.

Please proceed.

Good morning.

Good morning, Steven.

Steven, before you ask your question, I have to clarify something.

I was just told I misspoke on one of the slides.

When I said that AECOM received $15 billion worth of environmental work for high-speed rail, it should have been $15 million worth of work.

So I was off by a factor of (unintelligible).

Maybe in the next round.

I know you gave some color on the -- or the details on organic versus growth revenues.

I wondered if we could ask a few more questions there.

Can you give us the trend in PTS organic growth, ex FX in this quarter and the previous two quarters, please?

Well, I will tell you this quarter, if you take out the FX, we had about a 5% tailwind on FX, so it would be about negative 1%.

That's PTS.

That's PTS?

Just PTS only.

Okay.

So that was the fiscal first quarter.

And what was the fourth quarter?

NSR, too, by the way.

Sorry.

That was minus 1% on NSR and gross?

No, I'm talking minus 1% on NSR, minus 5% on gross.

Okay.

And how does that compare sequentially?

Sequentially, about the same, maybe off about a percent.

About the same, though, as Q4.

Okay.

All right.

That's fine.

And can you give us what the gross revenues were from acquisitions in the quarter?

Gross revenues from acquisitions, I don't have that number at my fingertips, Steven.

I could tell you --

That's okay.

I'll follow up with you offline.

Yeah.

I guess last quarter, you suggested that you see rapid acceleration of organic growth starting in the second quarter.

It sounds like things are moving in that direction.

Do you still expect that rapid acceleration starting in the second quarter?

We had, as we said in the last call, Steven, that we saw the acceleration of growth happening in the second half, which is third and fourth quarters.

Okay.

So in other words, we might expect the second quarter to still be negative on an organic growth basis.

I would say we're seeing growth.

And we're estimating it to be maybe slightly positive to flat.

Okay.

And then I'm wondering what was better than you expected in the quarter, because it sounded like you were guiding to less than $0.40.

Well, you know, the margins, exclusive of the one-time, were pretty solid.

So, you know, all in all, margins helped out.

Maybe the revenue growth was a little better than expected, margins were a little better than expected again, x one-time items.

Okay.

So it wasn't a factor of the severance being less than you were initially estimating or anything like that?

No.

Okay.

And then assuming you make more acquisitions this quarter, when will they start to be accretive on a GAAP basis?

Is that going to be fiscal 2011, or would it be beyond 2011?

It depends on when we do them, Steven.

Our general rule of thumb, and I think a rule of thumb that's safe for you to model, is the first 12 months of an acquisition are not accretive on a GAAP basis.

In fact, they're just about flat.

So depending on when we do a deal, if we did it at the midpoint of this fiscal year, we would expect it to be accretive in the second half of FY11.

Okay.

Great.

Thanks a lot.

Thank you.

And that's on a GAAP basis, not a cash basis.

Your next question comes from the line of Andrew Kaplowitz of Barclay's Capital.

Please proceed.

Good morning, guys.

Good morning.

So can you talk about your Asian and Australian markets?

I think both markets have been a good growth driver for you guys over the last couple of years.

And so I guess what I'm wondering is, with China showing some evidence of China slowing down their economy, how do you think about the Asian and Australian markets in particular going forward over the next couple of years?

Can you keep up the growth that you had in those markets?

Well, we've experienced significant growth in the Asian market and continued growth in Australia.

Clearly, Australia is being driven by the strong economies in China and in India.

As we see the market going forward, even though China is speaking about trying to pull back on some of its growth, there is still a significant amount of growth opportunities in the infrastructure market, not just in China but also Hong Kong.

And the stimulus programs in Hong Kong continue to fuel the growth.

And in China, we're seeing additional opportunities in the infrastructure and environmental markets.

So going forward, we look for a strong 2010 and at the end, a strong 2011.

Okay.

That's helpful, John.

And maybe, on the opposite side of the spectrum, the U.K.

has been dragging on you for a while.

And you're talking about some of these big water opportunities, but you're still taking severance charges in that particular market.

And I'm also interested in Dubai, what's going on there.

Can you give us a little more color on these markets that are dragging the growth rate down a little bit?

When do you think that they could swing more positive?

How long do we have to wait?

Okay.

The U.K.

market, unlike the U.S.

market, has been hurting for much longer.

And we started to feel it at the end of 2009, and we made it -- we started to make adjustments.

Now, and not that -- when we compare ourselves to some of the other firms.

But the redundancies that we had, which was about 10% of our Europe population of staff, we feel that we've right-sized the organization.

We took that hit in the first quarter, as we told you, and where we've restructured the operation and where -- I'm not going to say we're seeing a turnaround, but we feel confident that we've reached the bottom, and there are signs of improvement.

The water market, for instance, is one sign.

We're also seeing activity developing on the private side.

We're getting more phone calls from some developers which were not existent, were nonexistent for the past 18 months, 24 months.

So I'd say we probably see a bit of a turnaround beginning in 2011.

Great.

And one more, if I could --

You wondered about Dubai.

Yes.

Dubai is flat.

I mean, we're still working on projects there, but there is really no growth.

All the growth that we see is coming out of Abu Dhabi with the significant projects, and with more opportunities occurring in the transit and in airports as well as in the marine business.

Great.

I appreciate the color, John.

And one more, if I could, on the U.S.

market.

Clearly, you're talking about strength in transportation, and it's been that way for a while.

And maybe water is getting a little bit better.

But the overall growth rate of the company and recent PTS is still slightly negative.

So I have to imagine that there's still some pockets of weakness in the U.S.

What gets better in the second half of the year in the U.S.

to help drive the growth, because we do know it's a large portion of your business?

So what do you expect to get better?

Is that already in backlog?

Is that part of the reason why backlog kind of jumped quarter to quarter?

I think that's really a good question.

What we see in the second half is, one, transportation will remain strong as it has.

The growth areas that we see will be in water as well as in the private environmental sector.

The environmental sector over this past quarter has been soft because of the private side.

The government side still remains strong.

But some of our private clients had cut back.

But we're seeing that also changing.

And in the -- we don't put on -- on the private development side, we still see that remaining sluggish through the end of this fiscal year.

So really, it's water can inflect, and private environmental that they're just -- they've held back spending for the last year or two, and maybe they spend more in the second half of the year.

Is that kind of what --

Exactly.

Okay.

Thank you.

Okay.

Your next question comes from the line of Vance Edelson of Morgan Stanley.

Please proceed.

Hi, thanks a lot.

Nice job on the quarter.

First, on the jobs bills and the potential for one-year extension of the highway bill, is it your guess that the one-year extension is enacted?

And if so, would you view that as a positive, or were you hoping for maybe something a little bit larger if a new highway bill were put in place this year?

Oh, yes, I would like to see a new highway bill be put in place.

I think the extension -- and we're not going to see anything happening before -- we'll see extensions being put on, but we're not going to see a highway bill anywhere before the November elections.

I mean, that's out of the question.

The good news is that it's still going to be spending at about $40 billion in transportation.

The budget supports that in terms of -- matter of fact, we're seeing growth in the highway market, the transit market, as well as money being put into some of these development projects.

The National Infrastructure Innovation Fund, for instance, is going to be pumping in $4 billion.

The impact of the authorization bill is that it doesn't give government agencies that visibility.

I mentioned this on our last earnings call.

And so an agency which is planning on a long-term project, they're a little bit reluctant to move ahead because they don't have that visibility out the next five, six years.

Okay.

But all that being said, there is still a lot of money being spent.

And we've seen it's a pretty robust market out there in transportation.

Yes, no doubt.

And then a couple of quick things on the income statement.

The net interest expense made a move in the right direction.

Was that mainly a matter of the debt balance coming down toward the end of the September quarter, so that helped in the December quarter quite a bit?

Yes, we didn't -- we have a floating rate.

But the floating rate hasn't really changed all that much, so it's really a balance as opposed to any restructuring the debt.

Okay.

And remind us, Mike, on foreign exchange, what does forward-looking guidance contemplate for FX?

As we always do, we give our guidance at the spot rate.

So any movement either way going forward would be a positive or a negative to that guidance.

We don't try to predict the future of FX rates.

So the guidance that we've given today is based on a steady rate from today.

Okay, great.

And then just one more question.

You talked about the ability to continue targeting a 20 basis point margin increase annually, which I agree with.

Considering all the local offices that you have, it would seem that real estate savings could really add up to quite a positive impact in this real estate environment.

Could you just comment on whether there's any room for savings there?

Clearly, there's room for savings, and we clearly expect to extract savings from our real estate portfolio.

It's just -- it's not something you can do on a short term because you've got to wait for leases to wind out and try and look for coterminous opportunities as we bring our properties together.

And so that is something that will evolve over time.

But clearly, we think there is upside there.

Okay.

Makes sense.

Thanks a lot, guys.

Thank you.

Your next question comes from the line of John Rogers of DA Davidson.

Please proceed.

Hi, good morning.

Hi, John.

First of all, just in terms of your brand development expense, what are you assuming for costs for the rest of the year?

Normal state.

Okay.

So that we won't see a repeat of the -- what was it, $3.7 million?

That's right.

That was a one-time rebranding of all the collateral materials and other marketing efforts that went on when we launched the brand globally.

Okay.

And then, I'm not sure if it was Mike or John, you mentioned that as far as the first quarter went, you saw better margins than maybe you had thought at the beginning of the period.

And I'm just wondering, what are you seeing -- or how does that relate to pricing in the current market?

And given the work that you're booking, what are you seeing in terms of pricing?

I mean, it seems as if market activity or contracts available out there are more.

But is it more competitive, less competitive versus where we were a year ago?

Yes.

I think there are two different questions.

Okay.

The competitive nature of the business will remain the same.

I think it just as challenging to win work as it was two years ago.

So I don't think the competitive nature has changed.

On the pricing, though, on the private side, of course, there has been pricing pressure.

But again, there's pricing pressure, but our private clients have disappeared.

So that really becomes a moot point.

On the public side, there has been some, but I wouldn't say it's really been appreciable in terms of impacting our overall margins.

Okay.

So, John, the work that you're booking now isn't decidedly different in terms of margins, potential versus what you've had --

No, not at all.

-- in the past?

I'm sorry?

I said, no, not at all.

Matter of fact, what we're booking now is much larger projects than we have done -- have booked historically.

Okay.

And so that improves our margins.

Okay.

Great.

Thank you.

Thank you.

You have a question from the line of Avi Fisher of BMO.

Please proceed.

Hi.

Good morning.

Avi Fisher here.

Thanks for taking my questions.

Hi, Avi.

How are you doing?

Good, good.

Thanks for taking my questions.

I have a handful of them.

First of all, your percentage of self-performance work seemed to really accelerate this quarter.

What's driving the increase in self-performance at PTS and MSS?

Oh, it's just a matter of the nature of the projects that we get involved in.

There's nothing that I would point out as a trend or anything else.

It just depends on the nature of the projects.

Some have more subcontractors than others.

But I don't think there's anything to take from that.

Is there more, like more front-end engineering work, less construction management work, is --

Another thing would be maybe a mix of the work, frankly.

If you look at -- John mentioned the growth in Asia, for instance.

We had our Asian/Australian businesses are growing much faster.

The procurement methodologies in those countries typically don't cause you to run your subcontractors through your gross revenue, right?

So they are contracting directly with the subs.

And so if your non-U.S.

revenue grows faster and becomes a greater portion of your total, you end up having less subcontractor pass-through costs.

Got you.

Okay.

I think that helps a little bit.

Does that help explain why, even as you're increasing your self-performance, you're seeing some slack in gross profit trends at PTS?

You saw increased self-performance but a ten-bit decline in gross profit margins.

The gross profit margins that we focus on are really on an NSR basis.

For PTS, the pass-through costs are really irrelevant to us.

I know you focus on it because you build it into your models.

But for us, it's really irrelevant.

It's a pass-through cost where we don't take any risk, and we don't earn any margin, so we don't focus on it all that much.

Our margins -- our gross margins on an NSR basis have remained constant.

Was it -- I may have hopefully not calculated something wrong.

I calculate 8.6% gross profit on PTS, excluding that charge, the severance charge.

You're talking about operating margins.

Yes, gross profit margins, net revenue less direct costs.

Yeah, I'm not sure what you're looking at.

We're focusing on EBITDA margins.

And you need to look at it on a PTS-versus-MSS basis because you're going to get very different margins between those two sectors.

Well, what number should I have?

The EBITDA margins we showed you in the slides today.

Got you.

Okay.

I'll take a look at that.

As you increase self-performance work, should margins go up, though?

Again, the self-performance doesn't have a bearing on NSR margins.

It's --

I see what you're saying.

Okay.

I just -- take out the gross margin and the pass-through costs because we don't earn any margin, and we don't take any risk on it.

So just focus on margins based on NSR.

And then the pass-throughs don't come into the equation.

Okay.

Well, can you talk about the timing?

You had said last quarter, I think, that first quarter would represent 20% of annual earnings.

This puts it kind of towards the high end of guidance, just assuming that run rate.

Is there any headwinds that would keep you away from the high end of guidance, or above it?

It really comes down to a timing issue, right?

I think you're seeing all of the positive indicators for the quarter, such as the growth in backlog.

We mentioned, in our press release, the very strong wins in January in excess of $750 million.

And so we're seeing all the right indicators.

We're seeing the wins.

We're seeing the construction seasonality in the second half of the year usually picks up for us.

The outlays from the stimulus package, last quarter, we talked about an increase or -- I'm sorry.

We talked about 10% of the total stimulus package being outlaid to the states.

That's now increased to 18% of that has been outlaid.

So we're seeing the money starting to move through the system.

We're seeing the wins come onto our balance sheet, so to speak.

And then it's just a matter of, does that revenue really ramp up in Q3 and 4, or does some of it fall into Q1?

And so we still feel very confident about the year.

We feel very confident in our guidance.

But we don't want to get too far ahead of ourselves here after only one quarter.

Got you.

Thanks.

The MS- -- I just have a few more.

The MSS backlog burn rate, or revenue recognition seemed pretty high relative to prior -- the last two quarters or I think high relative to historic trends.

Are there project closeouts that are impacting this?

Is it the timing of backlog?

I'm trying to figure out what's impacting that.

Yes.

One thing about MSS, as we've said in the past, it's big projects.

And so very lumpy on wins.

And so, for instance, you've seen our press release.

Just in the month of January, we added $365 million of wins on one project for the U.S.

federal government in the MSS sector.

And so the size of those projects are bigger than any other projects in PTS.

And so you're going to get some lumpiness by quarter.

But there's nothing to be concerned about there.

Just if you look at the January win, if it happened two weeks earlier, you would have had a very different story.

Right, right, of course.

And then the JV income was a little bit lighter than I had expected.

And minority interest was also a little bit higher.

Has your JV participation changed now that you've -- with Earth Tech and with more self-performance and more -- you're a bigger company?

No.

It just depends on the projects and how we decide we want to team.

And it really -- if you look at it year over year, it probably averages out.

So nothing materially different from last year.

And on PTS and MSS, it's going to be hard to measure, as usual --

Correct.

-- kind of thing.

And then finally, your tax rate and your share count, your tax rate was lower than I had expected, but you held that steady.

Should we see taxes flow through the year, sort of in the same percentage of earnings?

No.

On the tax side, we're still -- in the guidance there, we talk about our 28% rate.

That's still the rate that we feel comfortable with throughout the year.

It's going to bounce around by a percentage up or down by quarter, depending on things that happen in the quarter.

This quarter, in particular, we had settled an IRS audit favorably, so it had a little bit of a favorable impact.

But overall, the effective tax rate of 28% is what you ought to have been modeling for the full year.

Got you.

And what was the value of that?

I guess I could back into it.

Was it the full 3% variance?

No.

There were two pieces to it.

The new FAS 160 implementation where the minority interest is shown below the net income line now when you see our 10-K.

Sure, right.

So that had a small impact on it because you show minority interest net of tax now.

So there's a slight movement due to the FAS 160 implementation in Q1 as well as a small impact due to the IRS settlement.

Got you.

And then finally, the share count, is that back-end loaded also?

No.

I think you raised the share count guidance.

By a little bit, right?

Yeah, half a million.

Okay.

So just sort of amortize that across the year?

That's right.

All right.

I appreciate you taking my questions.

Thank you.

Thank you.

Your next question comes from the line from Joseph Foresi of Janney Montgomery Scott.

Please proceed.

Hi.

I wonder if we could walk through again just sort of the back-end loading.

Maybe you could break down for us exactly what you thought is the reason for that, and why it would pick up.

Okay.

We -- put it in -- last year at this time, we just started to feel the impact of the global recession.

We had -- our first and second quarters, we showed -- we had significant growth, and we were flat in the third and fourth quarters.

During that time, we -- looking at the business, we had to focus on, okay, going forward, let's make sure we're winning work and building up our backlog.

And that's what we've done over the past several quarters.

And you could see the results as of this quarter with our increase in our backlog.

So as a result, now we have this built-in backlog.

And you have to build up the momentum.

And we realized that the first quarter was going to be similar to the fourth quarter.

And we're saying the second quarter, to be on the safe side, we have the same view of that.

But come the July timeframe, when you get into the June/July timeframe, the third quarter, the second half, we see a lot of things coming into place.

All these new jobs that we've won will be starting up.

Our construction, construction management services will go into overdrive with overtime, significant overtime.

We're going to be hiring people for bringing more people on board.

So it's like a flywheel.

It takes a while to build up the momentum.

And we feel that we'll be right in line come the summer.

So just to paraphrase, so basically what you're saying is that the pause that was taking place in the economy is now making its way through the numbers for two quarters, and then you expect the backlog that you are realizing now to make its way.

Yes.

It started at the second half of '09.

We saw the impact.

And we took some significant measures to cut our overhead and reduce our spending and focus on making sure that we were successful in winning a good book of business.

So would you characterize your visibility as very good on that recovery?

If this was 2007, I'd say yes.

In 2010, after going through 2009, I'd say it's good.

To say anything's very good, I'm optimistic, but I want to be cautious as well.

And my second question, just on the pace of stimulus, especially in regards to transportation, I think the majority of it's expected to be spent this year.

And it's expected to start sort of toward the middle of the year.

Is that still what you're seeing out there?

And do you expect a windfall?

And maybe you could anecdotally tell us some of what you're seeing that would lead you to believe what your belief is.

Well, first of all, it will be spent, given out, probably by the end of 2010 into 2011.

But the spending will continue.

These projects will go on for quite some time.

The money has been placed into projects here in New York City, for instance, Second Avenue Subway and THE Tunnel.

We're looking at -- we have now stimulus one and stimulus two, which is the Jobs for Main Street Act, which I don't know where it's going to come out.

But the Senate has an $82 billion bill with $25 billion in transportation which would be added onto the stimulus.

So we see the stimulus package, and then what the administration said in their State of the Union, that they believe infrastructure is a way -- infrastructure spending is a way to improve the economy.

We see that going forward over the next two years, that stimulus funding is going to be the catalyst to really drive our transportation and our water business.

I guess what I'm saying is we all kind of can see that the macro-picture looks very good.

But are you seeing anything on a day-to-day basis pick up within your business that gives you more conviction that the drip of spending is going to turn into more of a stream or anything in that particular vein?

Yes.

We've seen our new wins in -- as I mentioned, many of the states are having some problems.

But there are other states that are doing well.

And we look at some of our key states; New York, New Jersey, California, Texas.

And each one of them, they have major programs going forward.

In New Jersey, we just won a major project this quarter.

We didn't announce it, didn't mention it.

But the widening of the turnpike, it's a huge project for us.

And here it is in a state where people are thinking, gee, we don't have -- there's not a lot of money being spent.

We're still moving along smartly with the work that we're doing downtown at Ground Zero for the Port Authority.

We're moving ahead on work that we're doing with the MTA on the Second Avenue Subway, the East Side Access Program.

Stimulus money went into THE Tunnel, which is funded between, I think, the Port Authority and New Jersey Transit.

So there are a lot of things.

I mean, what we're doing in California, a significant amount of work in California is being spent.

They have a bond issue for -- I think it's $40 billion.

And now Obama is giving them a couple of billion dollars to do their high-speed rail.

So we're seeing, in more and more places here in the United States, as well as in Canada -- we haven't spoken about Canada.

But Canada is spending a ton of money in terms of infrastructure.

So on a macroscopic basis, if you look at it, you're right.

You say, gee, you don't feel like things are happening.

But when you look at it on a state-by-state basis or a regional basis, there are significant things happening.

And we run our business not on a macroscopic basis.

We run our business on opportunities and relationships that we have with clients.

So there is a -- that momentum I was saying before, it's building.

Thanks for the explanation.

Just one last quick one.

Maybe you can give us any color on acquisitions, what the pipeline looks like, what size deals you're targeting in any particular area.

Thank you.

We're looking at several acquisitions.

We're looking to expand our geographic presence in Europe, India, the Middle East, looking at Latin America, Brazil, Columbia, Peru, and in the United States.

In terms of our markets, we're looking to expand in our program management and construction management fields as well as in mining and power and energy.

The market -- the pipeline is quite robust, and we are very optimistic that we'll be able to do something within the next quarter.

Great.

Thank you.

(Operator Instructions).

Okay.

Well, since there's no one -- we don't have anyone else in the queue, I wanted to thank you all for participating on our call today and also for your continued interest in AECOM.

Please feel free, if you have any other questions or need any other information, to give us a call.

So with that, I'll say have a great day, and we'll speak to you in three months.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.